Phil Reiff Jr., Paine/Wetzel TCN Worldwide
Chicago’s 1.2 billion-square-foot industrial market has weathered the Great Recession and is now showing strong growth through expansion of the region’s traditional boundaries and by way of redevelopment in land-locked areas. At the center of this trend is O’Hare International Airport — sixth in the nation and 17th in the world in air cargo tonnage. All totaled, the O’Hare industrial submarket contains 103 million square foot of product.
Since the vacancy rate peaked at approximately 13 percent in 2010, the O’Hare industrial submarket has rebounded in a big way. In fact, the submarket has recorded positive absorption every year since 2011. The vacancy rate fell to 7 percent in 2014 due to an improving economy and the aggressive deal making of the larger industrial owners such as Prologis, KTR and Hamilton Partners.
Development Ramps Up
Shrinking vacancy rates and a lack of available Class A logistics facilities led to the delivery of multiple speculative developments in 2014. These projects were the first built since 2007. Panattoni completed 208,000 square feet at 1925 Busse Road in Elk Grove Village and leased the entire facility to CEVA Logistics.
The project was subsequently sold to AEW Capital Management at a
record-setting cap rate in the 5 percent range. Bridge Development was active in Elk Grove, where it delivered two speculative facilities that are currently 77 percent leased.
Build-to-suit activity also has gained a head of steam. The largest such development was a 491,000-square-foot build-to-suit for lease for DHL at 895 Upper Express Drive in Chicago on the northern border of the airport. Construction is now underway on a 130,000-square-foot food processing facility for LSG Sky Chefs in Des Plaines. However, with more new speculative development to be delivered later this year, build-to-suit activity should slow down for logistics users as their options continue to increase.
Liberty Property Trust and DCT Industrial are currently constructing 235,000 and 112,000 square feet of industrial space, respectively. Both properties offer trailer parking capabilities and should garner significant interest from transportation companies. With extra land at a premium in the O’Hare submarket, trailer spots are leasing as high as $200 to $250 per spot monthly.
Brokers Stay Busy
Paine Wetzel has also joined in on the fun as the market continues to improve. The firm represented Charlotte, N.C.-based SPX Corp., a Fortune 500 company, in its 10-year lease of a 72,000-square-foot Class A facility at 800 Arthur Ave. in Elk Grove. The deal included a 30,000-square-foot office/tech center build-out for SPX’s engineering department.
Paine Wetzel also represented Manna Distribution Services with its entry into the Chicago market. Based in Minneapolis, Manna is focused on white-glove home delivery of high-end, large consumer items such as furniture and major kitchen appliances. The company selected a 92,000-square-foot facility at 131 E. Thorndale in Wood Dale because of its centralized location with easy access to all of metro Chicago.
What’s Ahead?
The future of the O’Hare industrial submarket looks strong. Even with all the development underway, developers are still searching for the next available site that is larger than 10 acres. Older, functionally obsolete industrial properties with interior dock loading and low ceiling clearances are being targeted as possible teardown opportunities.
Land in the O’Hare submarket is trading for about $15 per square foot, and we believe rental rates should continue to climb as tenant demand for more functional product increases. Taking all these factors into consideration, we believe transaction volume for 2015 should surpass the level of activity in 2014.
— By Phil Reiff Jr., senior associate, Paine/Wetzel TCN Worldwide. This article originally appeared in the May 2015 issue of Heartland Real Estate Business.